Governor of the Bank of Israel Karnit Flug spoke today at a conference of the Aaron Institute for Economic Policy at the Herzliya Interdisciplinary Center. She said that the global economic environment in recent years, since the global financial crisis, had become more challenging for policymakers in Israel, because world trade was growing much more slowly than formerly, and because of the ultra-expansionary monetary policy adopted by some of the central banks in Israel's main trading partners. "These conditions obviously affect the macroeconomic policy required in the short term over the business cycle. The not-so-good news is that even in the long term, according to many assessments by various parties, global growth, and even more so world trade, the global economic variable with the greatest effect on Israeli exports, will continue to be more moderate than in the past.
"The various experts disagree about both the reason for the pessimistic forecast and the force of the downturn, but all of the assessments cite a significant downturn, in comparison with the years preceding the crisis. These forecasts about the future global environment make it more necessary to take action to increase Israeli productivity in the framework of economic strategy. Addressing the quality of human capital is a key element in this strategy."
Flug explained that world trade had grown by an annual average of 3% since the crisis, less than half of the growth rate in the years preceding the crisis. According to an analysis by the International Monetary Fund (IMF), the decrease in the ratio of investment to GDP is responsible for 75% of the slowdown in world trade. "At the same time, we are also seeing a slowing of the trend towards measures designed to liberalize trade, together with stepped up measures restricting international trade. This amounts to a certain reversal in the globalization trend of recent decades before the effect of the recent political changes was felt. All of these are contributing to a further slowing of world trade, resulting in lower growth in demand in recent years for Israeli exports than in the past," she stated.
"Together with this, the exceptional monetary expansionism adopted by some of the central banks in Israel's main trading partners has included low and even negative interests rates and quantitative easing. These factors have resulted in some government debt being traded at negative yields, and are exerting pressure on the shekel beyond the pressure deriving from basic economic forces caused by the strong performance of the Israeli economy, including the current accounts surplus. The result has been substantial appreciation in the effective nominal exchange rate of almost 20% since 2012 and 11.5% in the past two years, accompanied by growth in Israeli exports lagging behind the growth rate in world trade. All of these developments have also forced the Bank of Israel to pursue a policy of monetary expansion, reflected in interest rate cut, followed by the maintaining of the current rate at 0.1% for over two years, combined with foreign currency purchases aimed at preventing some of the excessive appreciation. This policy, together with a rather expansionary budget policy, have helped support the return of inflation to the prices stability target range and economic growth, which has being led by private consumption in recent years, given the weakness of exports," Flug added.
In the long term, Flug says that the global environment is expected to be moderate, and that world trade is projected to continuing growing at a modest pace. "With this background, increasing labor productivity, a key element in the ability to withstand international competition, has become increasingly important, and constitutes an essential condition for a sufficient rate of economic growth for narrowing the gap in per capita GDP between us and the most advanced countries," Flug observed.
Published by Globes [online], Israel Business News - www.globes-online.com - on May 4, 2017
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